A New Forecasting Model for USD/CNY Exchange Rate
Zongwu Cai, Linna Chen, Ying Fang
Studies in Nonlinear Dynamics & Econometrics
#002135 20131014 (published)
This paper models the return series of USD/CNY exchange rate by considering the conditional mean and conditional volatility simultaneously. An index type functional-coefficient model is adopted to model the conditional mean part and a GARCH type model with a policy dummy variable is applied to the conditional volatility model. We show that the government policy indeed has an impact on the exchange rate dynamic. To evaluate the out-of-sample forecasting ability, a prediction interval is computed by employing nonparametric conditional quantile regression. Our method outperforms other popular models in terms of various criteria.

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